House flipping is when you purchase a house as-is and make renovations to sell it for a profit. Flipping houses is one of the best investments you can make in real estate – as long as you know how to do it. Today, we’re going to talk about how to flip a house in Kentucky and give you 4 tips you should follow.
How to Flip a House in Kentucky
Tip #1: Only Purchase Houses That are Significantly Undervalued
To flip a house, you need to purchase a one that is significantly undervalued. Look for foreclosures or houses for sale as-is. These two types of houses for sale are the most affordable and will be the easiest to flip.
Choose foreclosures because the price of a foreclosed home comes from the balance owed to the lender for the home. It is not a true representation of the home’s fair market value.
Foreclosures are ideal houses to flip in Kentucky because the cost is significantly less than the value of the home, and they often don’t require as many repairs or renovations as homes being sold as-is.
When a house is sold as-is, the buyer is disclosing that there are issues with the house that they are unwilling to repair to make the sale. As-is houses may need new appliances, a new roof, or other repairs or upgrades to give the house its highest and best use. Houses for sale as-is have a lower asking price, making them ideal for flipping.
Tip #2: Use the 70% Rule
The 70% rule in house flipping means that you shouldn’t pay more for a house than 70% of its value after repairs.
To understand the 70% rule in house flipping, you need to know the after repair value (ARV) and the cost of renovations or repairs that you need to the property. The ARV is the value the home has after you make repairs.
To use the 70% rule, you need to use the following formula:
- ARV x 70% – repair costs = maximum offer price
This formula gives you the maximum offer price that you should offer to pay for a property that you want to flip.
You will need to determine two things when using the 70% rule. You will need to know the ARV and the cost of renovations or repairs.
To find the ARV, you should look at comps in nearby neighborhoods and surrounding areas to find good, qualified sales that have been recorded using homes that are similar to the one you’re interested in flipping. The comps should have the same number of bedrooms and bathrooms and should have similar square footage and materials used.
Repair and renovation costs can be difficult to determine when flipping homes, but you can typically estimate an average figure by knowing what needs to be done to the property to flip it.
To put this into perspective, we will give a real-life example below.
Say you need to know the maximum price you should offer for a property using the 70% rule. After repairs, the house should sell for $500,000. You have estimated repairs to be $75,000.
$500,000 x 70% – $75,000 = $275,000
So your maximum offer using the 70% rule should be $275,000.
Tip #3: Be Patient
A house flip is a long process, and it’s easy to become impatient as a real estate investor. It takes about 180 days to flip a house from beginning to end. In Kentucky, homes can sit on the market for as many as 60 days before and after the renovations. As a house flipper, you have a short window to make repairs to get the house back on the market. Don’t rush the process, but don’t cut any corners either. Make sure that you create a budget with a timeline and stick to it so you don’t spend too much money or take too long on the renovations.
Tip #4: Pay in Cash – Not a Loan
When flipping houses in Kentucky, you should always try to pay in cash instead of taking out a loan. When you take out a loan, you have to pay interest each month which can add up quickly, especially if the repairs take longer than expected. What’s more, if the house sits on the market longer than expected after the renovations, you may have to drop the asking price, which cuts into your profits.
We know that it’s not always possible to flip houses using cash, so if you take out a loan, try to stay within the budget you have set so that you don’t have to take out a bridge loan by borrowing more money throughout the process.
If you’re thinking of flipping houses in Kentucky, follow these 4 important tips. Purchasing affordable houses and using the 70% rule while staying on a timeline and a budget will be your best chance at success.